Examkin

Question

Difficulty: EasyDebt Securities and Bond Structure

An investor purchases a corporate bond with a par value of $1,000 that carries a 5% stated annual coupon rate and pays interest semi-annually. What is the dollar amount of each semi-annual interest payment the investor receives?

  1. $25Answer
  2. B
    $50
  3. C
    $100
  4. D
    $2.50

Answer

The investor receives $25 for each semi-annual interest payment.
The stated coupon rate of 5% on a standard 1,000parvaluebondyields1,000 par value bond yields 50 of total interest each year (1,000x0.05).Sincecoupon−bearingbondspayinterestsemi−annually(every6months),theannualinterestof1,000 x 0.05). Since coupon-bearing bonds pay interest semi-annually (every 6 months), the annual interest of 50 is split into two equal payments of $25 each.

Step-by-Step Solution

1
Calculate the total annual interest payment
Annual Interest = 1,000parvaluex51,000 par value x 5% = 50
The stated coupon rate is an annual percentage based on the bond's par value of $1,000.
2
Divide the annual interest by the number of payments per year
Semi-Annual Payment = 50/2=50 / 2 = 25
Corporate bonds typically pay interest semi-annually (twice per year), so each payment is equal to half of the annual interest.

Key Concept

Bond Coupon Payment Calculation
Rate this question

Topics

Debt Securities and Bond Structure

More questions from this topic